Design and Implementation of a Charitable Regulation Regime

Why is regulation of charity so pervasive? Is regulation justifiable from a perspective of economic theory? How can it be squared with the fundamentally private—that is, non-governmental—nature of charitable firms? This chapter explores five major questions in the design and implementation of regimes for regulation of charity, with the analysis centered in transaction-cost economics. I first consider the bedrock issue of what, if anything, justifies the extensive modern role government regulation plays in the private nonprofit sector. In many respects the question is not particularly different for charitable firms than it is for commercial operations. Unlike many commercial firms, however, charities in many developed countries are subsidized by the state, and these subsidies offer additional reasons for public oversight. The second and third sections are closely related, and examine from different perspectives the extent to which regulation of charity need be provided by government, rather than by private auditors or other monitors. The second section reviews the alternative of "voluntary regulation" or "self-regulation." In the third section, I evaluate arguments about whether private parties should be granted the right to sue charitable organizations to enforce compliance with law or self-imposed governance standards. In both sections I conclude that, while active government monitoring is likely essential to any effective regime, there also are openings for important contributions from private oversight. The fourth section considers a recurring tension in public supervision of charities, namely: how can charities represent a diverse array of private views when closely supervised by a possibly unsympathetic government? Courts and scholars of charity law tend to favor minimalist, bright-line, and procedure-based rules for charity governance, on the theory that these approaches reduce the room for bureaucratic discretion. I argue, to the contrary, that other institutional design choices can strike a better balance between safeguarding public interests and minimizing damage to the charitable sector. Lastly, in the fifth section, I examine what little is known about charitable compliance with law. The section provides an overview of compliance theory and evidence in the context of commercial firms, as well as the limited evidence available for charity.